Special Economic Zone
is not a new concept. China has successfully boosted its export and share in
world trade through SEZs. In India, SEZs contribute approximately 30% of total
exports of goods and services. However, not many SEZs have come in manufacturing
sector and maximum SEZs are in IT and ITeS sector. One of the key benefit for
SEZs is exemption from taxes / duties on construction material and from income
tax.
Introduction
SEZs are considered
deemed foreign territory within the country for extending tax benefits. Thus
supplies to SEZ are considered export and purchases from SEZ are considered
import.
Persons establishing
SEZs are termed as SEZ Developer. Persons doing exports from SEZ are termed as
SEZ unit. Developer lease out the space in SEZ to individual units.
Governing law
Initially, SEZs were governed by Chapter 7 of Foreign Trade
Policy of India. However, in 2005, Parliament passed a separate enactment (SEZ Act, 2005) and subsequently rules (SEZ Rules, 2006) were
framed.
Governing authority
Approval to set up SEZ
is granted by Board of Approval at Ministry of Commerce and Industry after
recommendation of concerned State Government and Development Commissioner.
After setting up, regular interaction of developer happens with Development
Commissioner.
Approval to set up SEZ
unit is granted by Unit Approval Committee / Development Commissioner of SEZ.
After setting up, regular interaction of developer happens with Development
Commissioner.
Single window clearance
Initially Government
intended to provide single window clearance to SEZ units and Developers in
terms of registrations and approvals under various applicable laws. However, it
has not happen till date due to lack of co-ordinations amongst the authorities.
Sector
SEZ can be set up for
- manufacturing of any product,
- service or
- trading.
SEZs may be set up for
manufacture of multiple products, services and trading are known as
multi-product SEZ.
Free Trade and
Warehousing Zones (FTWZ) are SEZ set up for trading activities. FTWZ may be set
up as standalone SEZ or part of any multi-product SEZ.
Investment
There is no minimum
investment limit in SEZ.
Location
SEZ can be set up
anywhere in India by a Developer after obtaining clearances from State
Government and Environmental clearances. SEZ units can be set up only inside an
approved SEZ.
Customs duty and Excise Duty
Customs and Excise
duties are exempt on import of construction material and capital goods by SEZ
developer.
For SEZ unit, Customs
and Excise duties are exempt on import or domestic procurement of capital
goods, construction material, raw material, packing material, consumables etc.
required for authorised operations.
All goods falling
under ‘restricted’ category under ITC (HS) may be imported in India by SEZ
Developer and unit without any import licence .
Exemption from Customs
and Excise duty to SEZ Developer and unit is also available to their contractor
and sub-contractors under “Bill to –ship to arrangement”.
There is no special Notification for exemption from Excise duty
and Customs duty for SEZ either under Central Excise law or Customs law.
Exemption from duties is in terms of provisions of SEZ Act.
Service tax
Service tax is exempt on provision of services to SEZ if
services are fully consumed within the SEZ. In case services are consumed
partly for SEZ and partly for domestic operations of SEZ owner then refund of
Service tax on proportionate basis available under Notification
No. 20/2013-ST dated 1 August 2013.
For availing
exemption, unit needs to get the following:
- Approval to list of services by unit approval committee (Unit approval of committees of SEZs have issued a default list of services to avoid hassle of granting approval to each individual unit and developer.)
- Form A-1 attested from specified officer of SEZ Customs and Form A-2 from Service tax authorities.
Exemption from Service
tax is not available on services provided procured by contractor and
sub-contractors engaged by SEZ developer / unit.
Central Sales Tax (CST)
CST is exempt on
inter-state procurement of goods by SEZ Developer or unit against Form I
specified under Section 8 of CST Act, 1956. Exemption from Service tax is also
not available to contractor and sub-contractors engaged by SEZ developer /
unit.
Value Added Tax (VAT)
Exemption from VAT
depends on State specific VAT legislations. In some States, exemption from VAT
is granted on sale of goods to SEZ developer and unit both while in some States
exemption is granted on sale of goods to only SEZ units engaged in manufacture
of goods (since they generate revenue for states on sale of manufactured goods)
and not to service sector units. E.g. Government of Haryana has clarified in
February 2013 that exemption from VAT would be available on goods supplied to
SEZ units.
Income tax
Profits of an
undertaking being a SEZ unit derived from export of services are exempt from
tax under the provisions of section 10AA of the Income Tax Act, 1961 (‘Act’) in
the following manner:
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Tenure of deduction
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Quantum of deduction
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First 5 consecutive years
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100% of export profits
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Next 5 consecutive years
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50% of export profits
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Next 5 consecutive years
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50% of export profits, subject to fulfilment of certain
conditions
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- Provisions of Minimum Alternate Tax (MAT)**applicable on export profits earned w.e.f. 1 April 2012. Accordingly this becomes an important factor while deciding the location of SEZ unit from entity level perspective.
- Units in SEZ are subject to provisions of Dividend Distribution Tax w.e.f 1 June 2011
- All other provisions of the Act shall become applicable while computing profits of the undertaking
Sale to goods and services in India domestic tariff area (DTA)
There is no
restriction or limit on sale of goods or services by a SEZ unit in DTA.
In terms of Section 3
of Central Excise Act, Excise duty is not applicable on goods manufactured in
SEZ. Goods manufactured in SEZ and sold in DTA are subject to Customs duty
equivalent to duties applicable on import of such goods from abroad.
Restrictions or
conditions if any applicable on import of goods from abroad would also apply to
goods sold from SEZ into DTA. Customs authorities of SEZ may also examine
valuation of goods under Customs Valuation Rules, 2007.
Provision of services
by SEZ units in DTA is subject to Service tax as applicable on services
provided by any other service provider.
SEZ units and
developer are out of CENVAT regime hence they cannot avail CENVAT credit of
Excise duty paid on inputs/ capital goods and Service tax paid on input services.
Foreign Direct investment (FDI)
- 100% FDI is freely allowed in manufacturing sector in SEZ units under automatic route, except arms and ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes, cigars and manufactured tobacco substitutes.
- No cap of foreign investments for SSI reserved items.
Drawback
Supplies to SEZ are
treated at par with exports. In case of supplies to SEZ unit, DTA supplier can
claim benefit of duty drawback similar to exports outside India provided SEZ
units makes payment in foreign currency to DTA suppliers.
SEZ developers cannot make payment in foreign currency hence
supplies to them is not eligible for drawback benefit. However, Government has
provided benefit to DTA suppliers under a different scheme –‘Reimbursement of Duty in lieu of Drawback’.
Application for the
benefits would be submitted by units before Development Commissioner and by
Developer before specified officer of SEZ Customs.
Net foreign Exchange earner
A Unit is required to
achieve positive NFE cumulatively for a period of 5 years from commencement of
production. NFE for this purpose to be calculated as under :
Positive NFE = A – B
> 0
A = Free on Board
value of exports and other specified supplies;
B = Sum total of the
cost, insurance and freight value of all imported inputs and capital goods,
value of goods obtained from another SEZ unit/ Export Oriented Unit/ bonded
warehouse etc, foreign exchange payments made for commission, royalty, fees,
dividend, interest on External Commercial Borrowing etc.
Off-Shore Banking Units (OBUs)
- Setting up of OBUs allowed in SEZs.
- OBUS are entitled for 100% exemption from income tax for 3 years and 50% for next 2 years.
Exemption under miscellaneous laws
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Other important points
- Excise duty if any paid on supplies to SEZ can be claimed as rebate also
- No time limit for bringing export proceeds in India
- 100% export proceeds can be maintained in export earner’s foreign currency (EEFC) account
- Merger of SEZ units belonging to same legal entity or different legal entities allowed by Unit Approval Committee
- Shifting of SEZ unit from one SEZ to another allowed with the permission of Unit Approval Committee
- Sharing of infrastructure between two SEZ units allowed
- Migration or shifting of STP units to SEZ allowed (only disclosure needs to be made to Unit Approval Committee)
- Old plant and machinery upto 20% of total investment in plant and machinery allowed. If this limit is violated, exemption from income tax would be denied (no impact on indirect tax exemptions)
- Work from home allowed to authorised employees of IT/ ITES SEZ unit subject to conditions
- IT/ ITES SEZ units allowed to set up their war site/ hot site/ disaster recovery site/ business continuity plansite in any EOU, SEZ or STP unit
- SEZ developer and unit required to register with Export Promotion Council for EOU and SEZ
- Transfer Pricing provisions apply to units located in SEZ having international transactions with their associate enterprises to ensure that the units receive arm’s length price even if their profits are exempt from income tax
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